Consider the Situation of Firm a and Firm B $$\begin{array} { c | c c } & \$ & £ \\\hline \mathrm { A } & \$ 6 \% & £ 5 \% \\\mathrm {~B} & \$ 7 \% & £ 4 \%\end{array}$$

question 44

Essay

Consider the situation of firm A and firm B. The current exchange rate is $2.00/£. Firm A is a U.S. MNC and wants to borrow £30 million for 2 years. Firm B is a British MNC and wants to borrow $60 million for 2 years. Their borrowing opportunities are as shown, both firms have AAA credit ratings. $$\begin{array} { c | c c } & \$ & £ \\\hline \mathrm { A } & \$ 6 \% & £ 5 \% \\\mathrm {~B} & \$ 7 \% & £ 4 \%\end{array}$$ The IRP 1-year and 2-year forward exchange rates are $$\begin{array} { l } F _ { 1 } ( \$ \mid £ ) = \frac { \$ 2.00 \times ( 1.06 ) } { £ 1.00 \times ( 1.04 ) } = \frac { \$ 2.0385 } { £ 1.00 } \\F _ { 2 } ( \$ \mid £ ) = \frac { \$ 2.00 \times ( 1.06 ) ^ { 2 } } { £ 1.00 \times ( 1.04 ) ^ { 2 } } = \frac { \$ 2.0777 } { £ 1.00 }\end{array}$$
-Devise a direct swap for A and B that has no swap bank.Show their external borrowing.Answer the problem in the template provided.

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Definitions:

Periodic Replenishment

Periodic Replenishment refers to the inventory management practice of ordering or producing goods at regular intervals, regardless of the inventory levels.

Continuous Review

A system of managing inventory where the stock levels are continuously monitored, with orders placed as soon as inventory drops to a predetermined level.

Safety Inventory

A quantity of stock kept on hand to prevent stockouts due to variability in supply or demand.

Product Availability

The extent to which a product can be purchased at any given time and location.